The allure of the Feds

Guest blogger Paul Parker

The McCarran Ferguson Act exempted insurers from federal regulation in 1947. This billion dollar industry is regulated by states, which are largely overmatched by insurers: underfunded, and lacking the expertise to regulate effectively.

The industry is a wonderful example of the problems of a free market. Company revenues come in part from premiums, but also from investment income. When investments are flush, insurance companies compete dearly for premium income—often selling policies at an actuarial loss. Then when investment incomes fall, some insurers leave the market, while other insurance companies ratchet up prices.

Consumers experience swings in pricing and availability of insurance; they complain to legislators, who then call for restrictions on lawsuits. This happened in the 1970s, in the 1980s, and in the 2000s. A law shifting products liability suits to the federal courts nearly passed Congress in the 1990s, but Majority Leader Lott larded special projects into the bill, and embarrassed people into voting it down. President Bush has indicated tort reform will be high on his domestic agenda during his second term.

And here in Missouri, the new Republican governor Matt Blunt will undoubtedly sign legislation restricting lawsuits that the Democratic governor Bob Holden vetoed. Is this reform necessary? Americans “know” people sue too much, but the evidence points the other direction: the state insurance department finds that Missouri has had one of the most profitable malpractice insurance businesses in the country, and that lawsuits against physicians have declined steadily, but to what end?

For example, the number of claims – which affect future payments -- has been falling, and the average payout has increased only 5 percent since 2000. But companies more than doubled their estimates of ultimate payments over the past two years, and at least one major carrier tripled its rates.

No matter, the push to restrict access to courts continues.

But some attention is being paid to the insurance companies. Recently, NY Attorney General Elliot Spitzer has pursued lawsuits against insurers. And the LA Times reports today that “Insurers Back U.S. Oversight:” insurance companies are rethinking their anti-federal regulation stance.

"Five years ago, our members would have said no to any federal involvement whatsoever," acknowledged Joseph Annotti, vice president of the Property Casualty Insurance Assn. of America. "But increasing frustration with disjointed state regulation is beginning to turn the question from being 'state versus federal' to being 'good regulation versus bad regulation.'

The article reports the lawsuits by Spitzer, and other AGs, as well as a five year old law that removed barriers to financial industry firms – banks, insurers, securities firms – from competing in each other’s turf.

"If anything could argue for federal regulation, it's this," said one industry executive. "The old saw was that it's better to deal with 50 monkeys than one gorilla. But when the monkeys are angry, the gorilla starts to look more attractive."

The issue for consumer advocates is whether the gorilla will be king of the hill, or merely stuffed: some consumer groups believe that this is merely meant to knock the teeth out of stronger state regulation. That would be a nice piece of irony: Republicans support turning power back to the states, until those states prove competent to do the job with which they have been entrusted?